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FRAUD AND THE COMPANIES ACT, 2013

I. INTRODUCTION The financial/ corporate frauds and scams which have taken place in India, required the attention of the Law makers. It was high time to evaluate the high standards in corporate governance and implement stringent provisions to tackle corporate Fraud. The problem was on the rise both in its frequency and severity. The increasing rate of white-collar crimes demanded stiff penalties, exemplary punishments and effective enforcement of law with the right spirit. Examples: Our country has witnessed several corporate Frauds, till date e.g. Rs.  5,000 crore Harshad Mehta scam in 1992, Rs. 7,000 crore  Satyam fiasco in 2009, the Rs. 27,000 crore  Sahara fraud case which started in 2010 and is sub-judice at the Supreme Court  currently. II. PROVISIONS IN THE COMPANIES ACT, 2013 The new Companies Act, 2013, (“the Act”) focuses on the issues related to corporate Fraud, as is visible, it may continue in the future too. The Fraud provisions are in force w.e.f. 12th September, 2013 and Fraud Reporting provisions are brought in force w.e.f. 01st April, 2014 under the  Act. III. DEFINITION OF FRAUD As per Section 447, Fraud in relation to affairs of a company or a body corporate, includes:
  1. any act,
  2. any omission,
  3. concealment of any fact, or,
  4. abuse of position committed by a person or any other person with the connivance in any manner – ,
    1. with intent to deceive,
    2. to gain undue advantage from, or
    3. to injure the interests of;
      1. the company, or,
      2. its shareholders , or,
      3. its creditors, or,
      4. any other person,
whether or not there is any:
  • any wrongful gain, or
  • any wrong loss.
where:-
  • ”Wrongful Gain” means the gain by unlawful means of property to which the person gaining is not legally entitled;
  • ”Wrongful Loss” means the loss by unlawful means of property to which the person losing is legally entitled.
EXPLANATION TO THIS DEFINITION To fall under this definition, these actions, omissions, concealment of the facts, should be done to deceive or to gain undue advantage which shall result in loss to the company or its shareholders or its creditors or any other person associated with the company and it may result in Wrongful Gain or Wrongful Loss. IV. FRAUD AS DEFINED IN SECTION 17 OF INDIAN CONTRACT ACT, 1872 “Fraud” means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract:
  1. the suggestion, as a fact, of that which is not true, by one who does not believe it to be true;
  2. the active concealment of a fact by one having knowledge or belief of the fact;
  3. a promise made without any intention of performing it;
  4. any other act fitted to deceive;
  5. any such act or omission as the law specially declares to be fraudulent.
EXPLANATION TO THIS DEFINITION In order to amount to Fraud, an act must be confined to acts committed by a party to contract with an intention to deceive another party or his agent or to induce him to enter into a contact. Fraud, which vitiates the contract, must have a nexus with the acts of the parties entering into the contract. This definition highlights the precondition to prove the intention of the person who has committed Fraud. If that person has willingly committed a Fraud, then he will be punished. Here the person means himself or his agent. The acts which include fraud are wrong suggestions or concealment of facts or false promises or any fraudulent act to deceive others. V. STATUTORY PROVISIONS OF FRAUD UNDER THE COMPANIES ACT, 2013
1. PUNISHMENT FOR FRAUD (SECTION 447):Any person who is found guilty of fraud shall be punishable with imprisonment for a term which shall not be less than six (06) months but which may extend to ten (10) years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three (03) times the amount involved in the fraud. Where the fraud in question involves public interest, the term of imprisonment shall not be less than three (03) years.2. PUNISHMENT FOR FALSE STATEMENT (SECTION 448):If in any return, report, certificate, financial statement, prospectus, statement or other document required by, or for, the purposes of any of the provisions of this Act or the rules made thereunder, any person makes a statement,—
  1. which is false in any material particulars, knowing it to be false; or
  2. which omits any material fact, knowing it to be material
he shall be liable under section 447. 3. PUNISHMENT FOR FALSE EVIDENCE (SECTION 449): If any person intentionally gives false evidence –
  1. upon any examination on oath or solemn affirmation; or
  2. in any affidavit, deposition or solemn affirmation in or about winding up of any company under this Act, or otherwise in or about any matter arising under this Act,
he shall be punishable with imprisonment for a term which shall not be less than three (03) years but which may extend to seven years (07) and with fine which may extend to ten lakh rupees (Rs. 10 Lacs). 4. PUNISHMENT WHERE NO SPECIFIC PENALTY OR PUNISHMENT IS PROVIDED (SECTION 450): If a company or any officer of a company or any other person contravenes any of the provisions of this Act or the rules made thereunder and for which no penalty or punishment is provided elsewhere in the Act, they shall be punishable with fine which may extend to ten thousand rupees (Rs. 10,000) and where the contravention is continuing one, with a further fine which may extend to one thousand rupees (Rs. 1,000) for every day after the first during which the contravention continues. 5. PUNISHMENT IN CASE OF REPEATED DEFAULT (SECTION 451): If a company or an officer of a company commits an offence punishable either with fine or with imprisonment and where the same offence is committed for the second or subsequent occasions within a period of three (03) years, then, that company and every officer thereof who is in default shall be punishable with twice the amount of fine for such offence in addition to any imprisonment provided for that offence. This section is not applicable to the offence repeated after a period of three (03) years from the commitment of first offence. 6. ADJUDICATION OF PENALTIES (SECTION 454): The Central Government may by an order published in the official gazette appoint adjudicating officers for adjudicating penalty under this Act. The Central Government shall also specify their jurisdiction. The adjudicating officer may, by an order impose the penalties on the company and the officer who is in default, stating any non – compliance of default under the relevant provision of the Act. Any person aggrieved by an order made by the adjudicating officer may prefer an appeal to the regional director having jurisdiction in the matter.
VI. OFFENCE OF FRAUD NON- COMPOUNDABLE As the punishment for Fraud is both imprisonment and fine, it is considered a non-compoundable offence. It shows that, the commission of Fraud has become a serious offence in the eyes of law. The Act has provided punishment for fraud under section 447 and around 20 sections of the Act talk about fraud committed by the directors, key managerial personnel, auditors and/or officers of company. Thus, the new Act goes beyond professional liability for fraud and extends to personal liability, if a company contravenes such provisions. Here, the contravention of the provisions of the Act with an intention to deceive are also considered as fraud, to name a few acts amounting to fraud:-
  1. Furnishing of false information at the time of incorporation  of company by promoters, first directors or any other person – Sec 7(5)&(6)
  2. Managing the affairs of the non-profit company fraudulently – Sec 8(11)
  3. Misrepresenting any material information in prospectus – Sec 34
  4. Inducing any person fraudulently to invest money – Sec 36
  5. Making of applications for acquisition of any securities in fictitious names – Sec 38(1)
  6. Issue of duplicate shares of company with intent to defraud or deceive – Sec 46(5)
  7. Transfer of any shares by depository or depository participant with an intent to defraud, deceive any person – Sec 56(7)
  8. Concealment of name or misrepresenting the amount of claim knowingly of any creditor – Sec 66(10)
  9. Failure to repay deposit with intent to defraud depositor -Sec 75(1)
  10. Furnishing of false statement, mutilation, destruction of secretarial documents – Sec 229
  11. Conducting business to defraud its creditors, members or any other person – Sec 213 (proviso)
VII. FRAUD REPORTING UNDER THE COMPANIES ACT, 2013 Section 143(12) to 143(15) of the Act contain provisions relating to reporting of Fraud, where the statutory auditor (who is appointed as per Section 139 of the Act), cost auditor who is appointed as per Section 148 of the Act) and the secretarial auditor (who is appointed as per Section 204 of the Act) are responsible to detect Fraud. In the event of detection of any Fraud, they have to first inform the Board of Directors and then to the Central government. Fraud Reporting is defined in Section 143 (12) of the Act as “notwithstanding anything contained in this section, if an auditor of a company, in the course of the performance of his duties as auditor, has reason to believe that an offence involving fraud is being or has been committed against the company by officers or employees of the company, he shall immediately report the matter to the Central Government within such time and in such manner as prescribed under the Companies (Audit & Auditors), Rules , 2014.” Section 143 (13) : No duty to which an auditor of a company may be subject to shall be regarded as having been contravened by reason of his reporting the matter referred to in sub-section (12) of Section 143 of the Act if it is done in good faith. Section 143(14): The provisions of this section shall mutatis mutandis apply to—
  1. the cost accountant in practice conducting cost audit under section 148; or
  2. the company secretary in practice conducting secretarial audit under section 204.
VIII. PUNISHMENT FOR DEFAULT BY THE PROFESSIONAL Section 143 (15): If any auditor, cost accountant or company secretary in practice do not comply with the provisions of sub-section (12) of Section 143 of the Act, he shall be punishable with fine which shall not be less than one (01) lakh rupees but which may extend to twenty-five lakh (Rs. 25 lakh) rupees. IX. FRAUD REPORTING PROCEDURE Rule 13 of Companies (Audit and Auditors) Rules, 2014 contains the operational procedure for reporting of Fraud prescribed in Section 143(12) of the Act. If the statutory auditor detects any Fraud, it is his duty to inform the same to the Audit Committee or the Board of Directors, seeking their reply within forty-five (45) days. After receiving the aforesaid reply, he has to forward his report to the Central Government within fifteen (15) days of receipt of such reply or observations. Even in the case of no reply from the Audit Committee or the Board of Directors he has to forward his report along with his comments to the Central Government within stipulated time frame. Similar provisions of Fraud Reporting are applicable to the cost auditor and the secretarial auditor. X. SERIOUS FRAUD INVESTIGATION OFFICE (SFIO ) The Central Government shall, by notification, establish an office to be called the Serious Fraud Investigation Office (SFIO) to investigate frauds relating to a company: This body shall consist of the experts from law, corporate affairs, banking, taxation, etc. It shall share the information which it is having with police department, taxation authority or with the State Government or any other investigating authority as per the need of the time. SFIO will submit its report to the Central Government. XI. SECRETARIAL AUDIT Realising the need to ensure compliance of laws in letter and spirit on continuous basis by an independent professional, the Act has mandated the carrying out of secretarial audit for bigger companies. XII. GOVERNMENT COMPANIES & FRAUD The provisions of the Act in relation to Fraud and its punishment, are equally applicable to Government Companies without any exemptions. XIII. COMPANIES (AUDITORS REPORT) ORDER, 2015 (CARO) Every report made by the auditor under Section 143 of the  Act, on the accounts of every company examined by him to which CARO applies for the financial year commencing on or after, 1st April, 2014, should include  the matters specified under CARO . The main objective being to detect fraud and inform about the same to the regulators. XIV. CONCLUSION The introduction of this stringent provisions in the Act, to tackle the problem of Fraud indicates how  serious the problem has been . Now, the stakeholders of a company can assure themselves of good corporate governance practices by the companies. In the event of wrong doings enough weapons are present under law to deal with the   issues of Fraud. It should be comprehended that corporate compliance lies not in the adequacy of legislature, but in its implementation. So enactments of various laws are not enough to eradicate fraud completely. Implementation of the law should be given more importance, to reduce the occurrence of fraud.
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